Oil Prices Drive Consolidation Among Producers

Oil prices have been on the rise, leading to a global consolidation among majors, but UK players appear to be missing out.

Making Up for Lost Time

Following Russia's invasion of Ukraine, crude oil has stayed above its 10-year average as Western nations continue to replace Russian exports. Profiting from higher prices, major players have generated large amounts of cash to buyout rivals at will. In fact, this has turned into the largest consolidation in the market since 2012, when average oil prices were in the triple-digit range. Meanwhile, OPEC+ has kept production cuts intact and most recently agreed to extend them to next year.

The recent ConocoPhillips-Marathon Oil M&A for $22.5 billion has brought the issue of consolidation to the fore. Experts believe this is just the start of further consolidation. In fact, a Fed survey showed that over two-thirds of major oil producers think of acquisitions as a cheaper or less risky way to rebuild reserves compared to exploring new production initiatives, a recent trend amid the world's moves towards renewables.

UK in Reverse of Global Trends

Major UK players are reducing their involvement in the North Sea, and this trend is expected to continue. Recent windfall tax increases have significantly reduced profits, and the potential for a new Labour government, which may introduce further taxes, is likely to accelerate this movement.

The UK is witnessing the opposite of the global trend as Big Oil spins off UK assets to smaller firms, such as Harbour, Ithaca, and Serica. Although M&A activity in the UK oil sector has been declining since at least 2021, an uptick was seen in the first quarter of 2024. However, some deals have been technical, such as Repsol and Equinor acquiring partners to take full control of UK units.

Source: GlobalData Oil & Gas Intelligence Center

Europe M&A Faces Same Issue

The Norwegian portion of the North Sea has seen increased oil production levels with the $1.2 billion Eldfisk North project between Norway and Denmark delivering its first oil supplies. Major companies ConocoPhillips and Equinor invested in this, but still, the situation in the EU is not different.

As with the UK, Europe is restricted by resources. For context, M&A activity in the US centres around rationalising operations in the Permian Basin. With European firms facing financing obstacles as lower credit ratings make raising capital for acquiring other companies' assets difficult, some players may consider divesting remaining interests in the North Sea. Beyond this, the UK oil and gas industry will probably remain out in the cold, with the UK's Footsie missing out on the gains US oil producers add to US indices.

Footsie Pulling Back

The UK's benchmark has declined notably from record highs. Nevertheless, the overall trend remains intact, with 8135 providing regional support. Even a fall to the 8050 swing could still signal further gains. Maintaining firm support could form a wedge or flag pattern, pushing prices above 8500. Above there, Footsie could find significance on round levels. In contrast, giving way to bears could result in further declines towards 7750.

Source: SpreadEx / UK 100

Takeaways

Oil prices have risen due to factors including the Russian invasion of Ukraine and OPEC+ production cuts most recently, leading to increased consolidation among major oil players seeking to capitalise on higher prices through acquisitions. However, UK oil companies appear to be missing out on this trend, with assets being spun off to smaller firms. As major producers reduce involvement in the UK North Sea due to the recent windfall tax increases negatively impacting profits, the oil and gas industry could remain isolated from gains seen elsewhere.